Posted by: Josh Lehner | November 30, 2022

Oregon’s Labor Market is Normalizing

Strong job growth and employment prospects are vital to economic health. However there is a difference between a strong and tight labor market and an overheating labor market. Given wage growth is clearly outstripping productivity gains, it is inflationary today. A slowing in wage growth (and an increase in business investment and productivity) is needed for underlying inflation to return to the Fed’s target as wage growth provides households their baseline ability to spend.

Encouragingly the data, especially the Oregon data, does appear to be turning in such a way that a slowdown in the labor market and wage growth is not just possible, but likely. Let’s start first with job openings. In September there were 1.5 job openings in Oregon for every unemployed Oregonian looking for work. Clearly labor demand (number of jobs that firms are looking to fill) is outstripping labor supply (number of available workers) which ultimately leads to the faster wage growth.

Better labor market balance could come from relatively fewer job openings or a large increase in unemployment. The Federal Reserve’s outlook is the former. This is sometimes referred to as the Waller view, named after Fed Governor Christopher Waller. In a speech earlier in the pandemic, Mr. Waller outlined how there could be a decrease in job openings which brought better balance and slower wage growth and inflation without a sizable increase in unemployment. So far this is playing out at least a little bit. Back in March there were 1.9 job openings in Oregon for every unemployed Oregonian. More progress and better balance is needed, but movement in the right direction is still movement in the right direction.

A key labor market concept is the so-called Beveridge Curve which looks at the relationship between job openings and unemployment. Generally speaking, firms are looking to fill more positions in a strong economy, and it is harder to find workers at the same time because most individuals who want a job are able to find one. During the pandemic this relationship has broadly held up as before, however what is potentially concerning is it appears to have shifted up, or shifted out as seen in the light blue dots when compared to the gray dots. What this would indicate is that for any given level of job openings, there will be higher unemployment in the economy than there was before the pandemic. One possibility is that this is a timing issue, or something the pandemic temporarily disrupted. Another possibility is something is fundamentally broken in the economy, or that the natural rate of unemployment has increased.

Encouragingly, the data so far this year in Oregon (dark blue dots) has brought the Beveridge curve about halfway back to the pre-pandemic patterns. This is exactly the Waller view in that job openings are declining and unemployment is not increasing. The U.S. data so far in 2022 shows less progress than does the Oregon data, although it has moved in the same direction. This morning’s national JOLTS release shows another step in the direction of better balance as well.

More encouraging is that labor matching in the economy – the speed at which unemployed workers are able to find a job, and firms looking to hire are able to do so – does not appear to be permanently broken in recent years.

The nearby chart looks at the job finding rate in the economy based on how many job openings and unemployed workers there are. It compares the actual job finding rate with the expected rate based on historical patterns. There was a clear breakdown earlier in the pandemic. This was likely due to the shutdowns, the virus itself, lack of in-person schooling and childcare, and federal aid including enhanced unemployment insurance benefits, however the data in recent months is now nearly back to the expected patterns as seen in 2019. This is a stepdown in labor matching or efficiency relative to earlier last decade, but so far the 2022 numbers look pretty similar to the 2018 or 2019 numbers. We can argue about it still being slightly lower, but broadly speaking it’s getting back to the same relative patterns.

This job matching work is based on a 2020 Fed paper from Ahn and Crane, which was updated more recently by the San Francisco Fed discussing the current state of the economy. Our office created an Oregon version to better gauge the local labor market.

Finally, new Fed research from Cheremukhin and Restrepo-Echavarria helps shed light on some of the changes in job openings and the economy in recent years. As the authors detail, when businesses hire workers they are either hiring someone who is unemployed and looking for work, or they are hiring a worker away from another firm, or poaching – a term the authors use. These are different segments to the labor market and have different impacts on job openings, wage growth, the unemployment rate and so on.

What the authors find nationally, and our office has recreated using Oregon data, is that the surge in job openings in recent years is due to more poaching. This has a few implications. First it means that the labor matching process, as discussed above, is not broken and unemployed workers are able to find jobs. Second, workers who switch jobs tend to see larger wage gains than those that stay at their jobs. As such, the higher rate of workforce turnover during the pandemic, including the higher rate of worker quits today as workers switch jobs, helps lead to both faster overall wage gains and inflationary pressures, and firms to advertise more openings to fill their newly vacant positions as workers leave for other opportunities. This is a distinct process from the possibility that unemployment is more structural in that the workers lack the skills needed for the available jobs, or that there is a geographic mismatch between openings and the unemployed, etc.

The decline in job openings so far this year, both nationally and here in Oregon, is coming from the poaching component and not the unemployed portion. This is encouraging that unemployed workers are still able to find jobs quickly, and that overall workforce churn may be slowing as well. As discussed in previous forecasts our office has hoped that the higher rate of worker quits, and job switching would lead to an overall better labor match. This could be in terms of skillset, geographic location and hours worked. At a minimum job switching typically is at least for higher pay. These temporary changes in the labor market, moving from one job to another, can be disruptive from a productivity standpoint. After a period of training or getting acquainted at a new place of work, the expectation is productivity will pick back up. A cooling in the labor market, where more workers are in better financial and workplace positions could be beneficial for the overall economy.

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Posted by: Josh Lehner | November 22, 2022

Thankful, 2022 Edition

It’s been a challenging couple of years. At the surface level, particularly for economic data most things are back to normal, even if there are clearly some lingering impacts on society and our daily lives. This Thanksgiving week I just wanted to share three charts I’m thankful for.

First, as we have tragically learned, pandemics are deadly. We have lost about 11,400 more of our neighbors, family, and friends here in Oregon than we would have expected in recent years. For that I am not thankful, but depressed. What I am thankful for is that the pandemic has waned. Deaths today in Oregon are nearly back down to where they were expected to be based on our office’s pre-pandemic demographic forecast. A return to normalcy in the most vital way.

Second, there has been no real permanent damage or economic scarring in the labor market. In fact the argument is the labor market is too strong, and certainly not too weak unlike the weak recoveries from recent recessions. Importantly these gains are widespread reaching workers in different geographic locations, workers of different races and ethnicities, and workers with different levels of educational attainment. The employment rates by educational attainment here in Oregon are higher today then they were pre-pandemic. These are the highest employment rates we have seen since before the Great Recession or the dotcom bust.

Third, income growth has boomed, putting more money in our pockets and our bank accounts. Yes, our strong household finances are a key reason why the underlying trend in inflation has risen, but stronger finances is still a good development. Income growth here in Oregon has been stronger. In the just released 2021 county and metro income data, Oregon’s metros have all outpaced the nation. Grants Pass, Bend, Salem, Albany, and Medford all among the 10 percent strongest increases among all U.S. metros.

Even more reasons to be thankful is the income growth among all households. Here is what we wrote in our most recent forecast doc:

Last quarter our office flagged the possibility for differences across the distribution when it comes to household finances. Given income and wealth inequality in the U.S. and here in Oregon, many of the topline economic data on income and spending are driven by high-income households. The concern was low- and middle-income households could be falling behind due to high inflation and any slowdown in the economy.

Thankfully this does not appear to be the case. New data through the second quarter from both the Federal Reserve, and the JP Morgan Chase Institute show that low- and moderate-income households are still doing well financially. Checking account balances remain strong and show no deterioration across the distribution. Net worth for all households is higher today than before the pandemic (gray bars). If we narrow the focus to the most recent two quarters where inflation has been the hottest (blue bars), net worth still rose among low- and middle-income households, while high-income households net worth declined along with equity markets. Our office will continue to monitor these quarterly updates on household finances across the distribution.

Happy Thanksgiving everyone.

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Posted by: Josh Lehner | November 16, 2022

Oregon Economic and Revenue Forecast, December 2022

This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary and a copy of our presentation slides.

A recession now appears more likely than not. The consensus among national forecasters, and our office’s advisors expects a mild recession to begin within the next year. This change in the baseline forecast is not due to any fundamental deterioration in the economy in recent months, but rather a shift in assessing the risks. In particular with inflation remaining well above the Federal Reserve’s target, expectations are that interest rates will need to be higher and held there longer than previously thought. Slamming on the brakes of a speeding car will cause it to skid and even fishtail. The question is whether the driver is able to pull out of it or end up in the ditch. Most economists today believe a recession is likely, even if the exact path of the economy is uncertain.

Our office has now incorporated a mild recession in Oregon starting next summer. Job losses total 24,000 for a 1.2 percent decline. Job losses will be larger in goods-producing industries like construction and manufacturing, and industries tied to them like finance, and transportation and warehousing. The unemployment rate increases from today’s 3.8 percent to a peak of 5.4 percent in early 2024. Income and spending slow, but do not turn negative. Such a cycle would be one of the shallowest, and shortest recessions on record, similar to 1990. The nature of the cycle is more technical than fundamental, more of a fender-bender than a head-on collision.

There are three reasons why a milder recession is to be expected today. First, businesses, financial markets, and households all indicate that they expect today’s high inflation to slow in the years ahead. If high inflation is not fully embedded in long-term decision making, it likely only takes a milder recession to bring inflation down.

Second, it has been difficult to find workers for the past handful of years. The labor market is cyclical tight due to a strong economy, and structurally tight for demographic reasons as the large Baby Boomer generation continues to retire. Firms do not want to let go of workers, and likely will work to hold onto workers even as sales slow in the years ahead. Economists call this labor hoarding. With record corporate profits, many businesses have the financial room to do just that.

Third is the strong financial position households are in. Consumer spending is expected to hold up well in the pending recession in large due to the higher level of savings, which is for households across the distribution. Should spending remain strong, firms will have less incentive to cut jobs. Today’s strong household balance sheets can help short-circuit the typical negative feedback loop of a recession.

The baseline economic outlook now calls for a mild recession. This is hard to see in the topline outlook for state revenues, as the forecast for available resources remains roughly unchanged in the near term. The recession is expected to be mild, and personal income is expected to remain stable despite job losses. Underlying personal income is not only the primary driver of Oregon’s dominant personal income tax, but also a wide range of consumption-based taxes including the corporate activity tax and lottery sales.

In terms of job losses, the baseline scenario looks identical to the recession of 1991. The 1991 cycle was unique in that it did not result in a pronounced downturn in state revenues, only a couple of relatively flat years of available resources.

Unlike what was seen during the 1991 cycle, revenues are expected to drop going forward with or without a recession. General Fund revenues are due for a hangover in 2023-25 even if the economic expansion persists. Recent gains have been driven by taxpayer behavior as well as by underlying economic growth. After so much nonwage income was pulled into tax years 2020 and 2021, less will be realized in the near term. As profits and investment income return to earth, and a record kicker is paid out, expected revenues next biennium will be around $3 billion lower than the current biennium. That said, it is surprising that the recession call did not make this expected decline noticeably worse.

This taxpayer behavior also puts Oregon’s revenues at risk of the sharp declines experienced after asset market corrections in 2001 and 2007. With recession on the horizon, profits and gains could soon turn into losses, and a smaller share of filers could be subject to the top rate. Recent revenue growth has been more pronounced than during any other period on record. During tax year 2021, personal income tax liability grew at almost double the pace of that was seen during the peaks of the housing and technology booms. Hopefully, the upcoming hangover in revenue growth will not be as pronounced.

The bottom line is that the unexpected revenue growth seen this year has left us with unprecedented balances this biennium, followed by a record kicker in 2023-25. The projected personal kicker is $3.7 billion, which will be credited to taxpayers when they file their returns in Spring 2024. The projected corporate kicker is $1.3 billion, which will be retained for K-12 educational spending.

See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.

oeaforecast1222Download

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Posted by: Josh Lehner | October 12, 2022

2022 Population Growth Expectations

If inflation is the key macroeconomic issue to watch, population growth is the key Oregon issue. The state’s ability to attract and retain working-age households is the primary reason why Oregon’s economy grows faster than the nation over the entire business cycle. The inflows of young, skilled migrants allow local businesses to hire and expand at a faster face due to the growth in the local labor force. Given deaths now outnumber births statewide, Oregon’s population growth will come entirely from net migration.

Migration is pro-cyclical. People move less in bad economic times when job opportunities are harder to come by but move more in good economic times as they chase those more-plentiful opportunities. As such, Oregon’s population growth slowed in 2020 and slowed further in 2021. Expectations are for the upcoming 2022 population estimates to show a rebound. Portland State’s Population Research Center is set to release their 2022 population estimates in November, while the Census Bureau’s estimates will be released in December.

The two primary reasons why our office forecasts a rebound in population growth is that this is the typical pattern seen over the business cycle and the fact that the number of surrendered driver licenses at Oregon DMVs remains strong. Surrendered licenses have historically been the best leading indicator for migration as when one moves to a new state, she has to turn in, or surrender her license from her previous state in order to get a license from her new state. As such, surrendered licenses are a good measure for in-migration into the state. The data point toward the expected rebound in migration to Oregon. This data was disrupted by the pandemic due to shutdowns and a period of appointment-only time at the DMVs, but encouragingly the underlying trend in the past 6-9 months is still higher than the pre-pandemic trend. One qualifier is that Oregon DMVs did get new software during the pandemic, which presents the possibility that the recent data is not perfectly compatible with the old data. Time will tell.

While surrendered licenses are a good measure of in-migration, they do not tell us anything about out-migration. At a basic level what matters most is net migration, or the difference between the inflows and outflows. Net migration to Oregon could remain lower than anticipated if out-migration has picked up to offset the increased in-migration. Not all states regularly publish their surrendered license data, however Washington does. Both Washington’s overall level of surrendered licenses, and those specifically from former Oregonians have returned to pre-pandemic patterns, giving at least some indication that outflows from Oregon are not necessarily higher, and also that the general rebound in migration is across the Pacific Northwest.

That said, research from the Federal Reserve Bank of Cleveland that analyzes credit reports continues to show above-average out-migration from high-cost, large metro areas across the country. This is particularly relevant as our office’s long-standing concern is that housing affordability is a risk to the outlook. If fewer households can afford to live here, and in a world with increased working from home opportunities, the U.S. may continue to see faster growth in lower-cost metros and slower growth in high-cost metros. Included in the Cleveland Fed research is both Portland and Seattle, but no other areas in the Northwest.

The data show that there are larger increases in outflows from the Portland region to destinations more than 150 miles away. The increases when compared to pre-pandemic patterns are largest to small and medium sized metros (less than 2 million) and rural areas, although outflows to other large metros is up as well. Seattle’s shift in patterns are primarily to other metro areas more than 150 miles away, while moves to nearby locations are down just a hair.

Bottom Line: So far we only have one real year of population data during the pandemic. We will get the 2022 estimates in the months ahead. It will be important to see if the 2021 patterns of growth, like the out-migration from large urban cores nationwide, and faster population growth in the Intermountain West, etc, continue or start to even out. One year of data is not the be-all and end-all, but 2022 should provide some indications of where population growth is returning to normal, and where it is not.

One final and speculative note. In the 2021 estimates Portland State and Census differed, particularly when it comes to Portland. PSU estimates showed slow, but positive growth. Census showed outright declines, relatively small, but still negative*. It will be interesting to compare and contrast the upcoming 2022 estimates. There is a chance they will once again tell different stories. Possibly even a further slowdown or another year of subdued growth from the PSU estimates while Census shows a rebound. Such a hypothetical would mean a couple of things. First it would mean the actual 2022 population estimates from the different sources would be closer together. However second it would mean the path in which we take to go from 2019 to 2022 would be different and provide different interpretations. Again, I don’t know what the upcoming data will show, but am trying to think through the reasonable possibilities and their implications for the forecast. It is also possible that given all of this, including the lingering effect of the pandemic that we will really need to wait for the 2023 data to have a better read on things.

* The 2021 Census estimates showed population declines in nearly all of the primary (largest) counties in major metro areas. It wasn’t just Portland, San Francisco, and Seattle, but also Atlanta, Dallas, Nashville, and Orlando among others. There is a very clear urban-suburban-rural dynamic to the Census estimates that at times gets boiled down or even forced into a blue state-red state discussion. At this point we only have one year of pandemic population estimates and are about to get a second year of data. It will be interesting and important to see how what this pattern looks like in the new 2022 data and in the years ahead. Some of those discussions may very well be right, but we lack the hard data to say decisively today.

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Posted by: Josh Lehner | October 5, 2022

More on Oregon’s Household Formation Boom

While population growth slowed earlier in the pandemic, we know that overall household formation certainly did not. As discussed the other day, from 2019 to 2021 the increase in the number of Oregon households outpaced net new construction by nearly 25,000. This deficit was evident in all parts of the state, resulting in tight ownership and rental markets. Unfortunately, Oregon was not alone. During the pandemic the housing shortage went national with household formation outpacing new construction in every single state.

Looking forward, household formation will slow. Some of the recent, strong increases likely represent a pull forward of demand from future years. A key measure is the so-called headship rate. Headship rates are the share of individuals who are a householder (formerly called head of household). It represents how many households there are relative to the size of the population.

In terms of the pull forward in demand, this is particularly the case for homeownership given the large increase in both headship and ownership rates among Millennials. Given affordability has fallen off a cliff with the sharp increase in mortgage rates, which are expected to remain high for the foreseeable future, it will likely be a couple of years before ownership demand fully returns. In a sense, Millennials were a key driver of the pandemic housing market and certainly those that suffered the most from it.

When looking at the data, the big picture story is homeownership increased a bit across most middle- and older-aged households. The overall homeownership rate in Oregon now stands at 63.8%, its highest rate since the mid-2000s when it was in the 64-65% range. By far the biggest increase in ownership during the pandemic was seen among the older Millennials. Younger Millennials, who are more likely to lack the incomes and wealth needed to buy homes, did not see an increase in ownership. However the younger Millennials did see the largest increase in headship rates. What the data implies is that there was a big increase in household formation among 20-somethings that filled all the newly vacated rentals as more households shifted into ownership.

Rental demand has more cross currents moving forward. The near-term risks are weighted to the downside. On one hand, some of the pandemic strength is due not to more households being formed per se but likely due to fewer households dissolving. The expiration of rental assistance and eviction moratoriums means some households will be lost. Keep in mind that many of these households would have dissolved, or fallen through the cracks previously if not for the increase in aid and moratoriums. Now that those are gone, a return toward pre-pandemic patterns is expected. Furthermore, when a contagious virus is going around, people desire to have fewer roommates for health reasons. As the pandemic wanes, living with roommates will again be more common. This should be most evident among young renters in the city, as compared to fewer changes in household size in the suburbs.

On the other hand, the combination of income growth, rebounding migration, underlying demographics, and sharp decline in ownership affordability all point toward solid rental demand. Note that rental and ownership household formation tend to move together over time, but given the large, sudden change in ownership affordability, there may be a temporary mismatch today where rentals hold up longer.

One wildcard here are rents themselves. Affordability problems are a big reason why household formation slowed in recent decades. To the extent that today’s high rents once again impact people’s ability to live on their own or require them to share the costs across more roommates, then the recent household formation boom may be short-lived. However, there are two reasons why most the headship rate increases are likely to stick. First, the increases only bring headship rates back to where they were in 2010. These are not rates wildly out of line with recent history. Second, there are currently a lot of housing units under construction but not yet finished. So if demand (household formation) is slowing, and supply is catching up, this should bring better balance to the market and slower price increases, which in turn help hold up the headship rates.

These trends are seen statewide as shown above, but are a bit more pronounced in the City of Portland, the state’s primary urban center. Formation rates among 20- and 30-somethings in Portland proper really increased in recent years. This large of a jump is due to both the numerator and denominator moving in the headship rate calculation. The number of households did increase, but the population growth was slower or stagnant, pushing the headship rates mathematically even higher than you’d think otherwise. If there are going to be household formation declines in the years ahead this is where I would look first. Now, to the extent this shift is due to many of the new apartments being studios, then it could be a fundamental change. To the extent this shift is more about having fewer roommates during a pandemic, it would be reasonable to expect declines as people take on roommates at something closer to pre-pandemic rates.

Note: As you can see in the chart, headship rates are higher in the city than in the suburbs. This confirms the stereotype that those living in city tend to be single and/or childless to a greater degree than the suburbs, where families are more prevalent. Of course stereotypes are not monolithic. But the data do confirm these trends and show smaller household sizes in the city and larger household sizes in the suburbs.

One final thought. The 2020s economy should not be a repeat of the tepid 2010s. The labor market will be tighter and income growth likely faster, particularly for younger workers and households. Household formation should likewise be stronger. This is especially the case if new construction is boosted to address the state’s historical underproduction, providing both more units for Oregonians to actually live in, and better relative affordability so that we can afford to do so.

To really get at household size by age and type of unit, plus any further breakdowns by race and ethnicity, incomes, more specific geographic locations and the like, we really need to wait for the microdata to be released in the weeks and months ahead.

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Posted by: Josh Lehner | October 4, 2022

Update on Household Finances (2022q2)

Strong household finances have been the economic story of the pandemic. I know we have talked about it a lot but there are a couple of new pieces of data worth highlighting to help update the overall picture. Last Friday the Bureau of Economic Analysis released U.S. data on income and spending for August, and state level income data for 2022q2. Included along with each were revisions. Let’s take a quick look at two things that stand out with the revisions.

First for the U.S. incomes were revised down slightly and spending up moderately. The net result of lower incomes and higher spending is less savings. The implication here is that the estimates of “excess savings” for households is both smaller and being drawn down faster than previously thought. Now, savings is still increasing overall, when we say excess savings we are talking about above-trend savings that happened early in the pandemic. The total amount of savings today is still higher than it was pre-pandemic. However the impact of inflation forcing households to spend more so far this year is larger than the previous data had indicated. The current data shows that the U.S. personal savings rate today is 3.5 percent which is less than half the pre-pandemic savings rate. Even so, our office’s calculation of excess savings still stands at $1.4 trillion. The current version of the data shows that the stock of excess savings has been drawn down by about a third, whereas the previous version indicated it was more like a tenth. That’s a meaningful difference.

Note: Estimates of excess savings are sensitive to the baseline trend used. Even so, most estimates I have seen are in the $1.2-$1.7 trillion range. For the record I am using the Jan 2019 – Feb 2020 average savings rate as the baseline and calculating deviations relative to that over the past two and a half years.

Regarding savings in Oregon here is what our office wrote in our most recent forecast:

While timely Oregon data is lacking, our office’s contacts among local financial institutions confirm similar patterns are seen locally as well. Deposits at local banks and credit unions surged earlier in the pandemic, however deposit growth has slowed noticeably so far in 2022. Oregonians have money, and higher bank account balances today, but those balances are not growing quite as quickly as we are paying higher prices for the same goods and services.

Second, Oregon’s incomes in the second quarter came in slightly above forecast (0.7 percent). However this is a mixture of two things going on. On one hand historical revisions to Oregon income were up by about 1 percent overall. On the other hand that means after accounting for the revisions, incomes came in slightly lower than expected, due to a slowdown in aggregate wages. That’s a lot to unpack and our office will discuss it further in our next forecast, due in 6 weeks (Nov 16th).

On the revision side the real story is the large, upward revision to Oregon non-wage incomes. Nonfarm proprietors’ income is revised up by about 7 percent. Dividends, interest, and rent is revised up by about 4 percent. All other types of incomes were relatively unchanged by this round of revisions. Given the tax season we just experienced, these upward revisions to non-wage income are no real surprise. In fact given just how strong tax returns have been, further upward revisions in the future are likely.

This post is mostly just an update on the state of where things stand, or at least where they stand based on the latest data. If there is some sort a big picture takeaway from this its something like the following. When households have the ability and are showing the willingness to pay higher prices, it can reinforce and sustain faster inflation. Yes, a big part of the inflation story today is the reopening of the economy, the overloaded supply chains, and the oil shock from Russia’s invasion of Ukraine. However that’s not everything. The risk here is that if the higher underlying trend in inflation gets embedded in the economy than the economic pain needed to bring it back down to the Fed’s 2 percent target will be bigger.

From a macroeconomic perspective we do need to see slower income and spending gains to slow that underlying trend in inflation. We also need more business investment and productivity gains. But if savings is being drawn more than previously thought, and wages are coming in a little below forecast, combined with asset markets being down this year, these are all things that normally look worrisome but in the context of today’s economy are needed and welcomed. As we wrote in our document the data is possibly beginning to fall into place, but getting everything just right is hard when the actual impacts of Fed policy are not known for quite some time.

Lastly, a big concern here is the distributional impacts of inflation, incomes, and spending. We know that low- and moderate-income households suffer the most from high inflation. They live paycheck to paycheck and so high inflation impacts every single dollar they earn. One counterbalancing factor here is that wage growth remains strongest among lower-paying industries and occupations. And a tight labor market is driving employment rates higher for all Oregonians regardless of geographic location, race or ethnicity, or educational attainment. It’s national data, but we did just get two new encouraging updates on this front through the second quarter. The Federal Reserve’s distributional accounts show that net worth is rising and even liquid assets like bank account balances, which are part of “other assets” in the data, are holding steady for households in the lower two quartiles. Similarly, new data from the JPMorgan Chase Institute show that account balances remain up across the distribution.

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Posted by: Josh Lehner | September 20, 2022

Addressing Oregon’s Housing Shortage, Workforce Needs

We know Oregon has underbuilt housing by about 5 years’ worth of new construction in recent decades. The household formation boom during the pandemic likely pushes that to more like 6 years’ worth of new construction that we are behind. Our office’s housing starts forecast does not make up for the existing shortfall. Our forecast is more of a population, demand-driven outlook. To fully address Oregon’s housing shortage there will need to be significant changes made to the supply side of the housing industry. This includes addressing the availability of land to build on, turning the available land into buildable lots, allowing more development types and units on the buildable lots, the cost of and timeliness of permitting new construction projects, and a bigger workforce to actually build more units.

Tackling any one of these major supply constraints can be thought of as a necessary, but likely insufficient condition to truly boost housing supply in Oregon. There are a number of efforts currently underway looking at some of these, particularly around zoning following the passage of HB 2001 (duplex legalization) and HB 2003 (regional housing needs analysis) back in the 2019 session. This process can take time, both administratively to implement policies on the ground, and then for the market to respond in a meaningful way to the extent that it does. Given these ongoing efforts, our office recently looked at one of the other constraints to try and help gauge the future needs of increasing housing production.

In order to build more housing, Oregon will need more workers to do so. The construction industry has experienced essentially zero productivity gains in recent decades, and has a growing share of the industry in management positions, with a corresponding declining share in actual construction (building) occupations. This means a larger workforce truly is needed to increase production. Our office did some scenario work to try and figure out how many more construction workers would be needed if the state were to make up for the existing shortfall over the next two decades. We took two different approaches. One was to use National Association of Home Builders estimates of the number of jobs per housing start, allowing for differences between single family and multifamily starts. The other was to look at total residential construction employment and estimate new construction versus remodeling and repairs based on industry spending patterns. Over the past 10-15 years both approaches showed essentially the same employment needs here in Oregon. It works out to about 1.4 or 1.5 jobs per housing start.

Taking these methods and applying them to the existing shortfall shows that after a multiyear ramp-up period, Oregon will need approximately 13,000 additional residential construction workers in the years ahead. This would allow Oregon to build about 9,000 more housing units a year above the baseline forecast. Looking at existing staffing patterns, obviously the vast majority of the needed workforce will be actual construction workers like carpenters, electricians, laborers, painters, and the like, but there will be a need for increased business operations, office support, and management type jobs as well to handle the larger workloads.

An overall increase in the number of construction firms is likely needed as well. Even as construction employment today has fully rebounded, both overall and as a share of the economy, the same cannot be said for the number of construction firms. Yes, the number of contractors is at an all-time high, but remains about one percentage point smaller as a share of the overall number of Oregon firms. This implies Oregon has about 1,100 fewer residential construction companies than expected when compared to the pre-housing bubble era. What this really means is there was industry consolidation when the bubble burst, and then no real increases in new business formation to make up the lost ground over the past decade. This has likely been a housing constraint in recent years as well.

We know that recruiting and training workers is challenging in a tight labor market. The good news is that the number of young Oregonians working construction today is essentially as large as it has been. Even so, one challenge here is that residential construction tends to pay wages that are 15 percent below the average of all industries. The higher construction wages are paid for nonresidential work, which is about 30-40 percent above average.

Finally, when it comes to workforce needs we know that local governments will need to increase employment in their planning and building departments in order to approve more plans, issue more permits, and inspect more projects. Estimating the need here is harder. After combing through budget and personnel reports across a handful of major Oregon cities, it appears that current staffing ratios are about 0.04-0.05 FTE per new residential permit. These are inclusive estimates of all type of occupations within these departments after adjusting for commercial vs residential and the like. If any city or county wants to share their own estimate, please let me know.

What this means is that local governments will need to hire about 450 additional workers to handle the increased workload. However, in order to both handle the increased workload and increase timeliness, the employment increases may need to be even larger. One challenge here is the decentralized nature of this work. These additional workers are needed at the local level in building and planning bureaus or departments across the state. Every city and county in Oregon will need to hire a couple to a couple dozen such workers.

Below is an expanded set of slides based on what I presented to the House Committee on Housing on 9/21/22.

addressing-oregons-housing-shortageDownload

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Posted by: Josh Lehner | September 16, 2022

Oregon Household Formation Boomed During the Pandemic (Table of the Week)

Earlier this year our office looked at the seemingly contradictory data in the housing market. On one hand we know population growth overall slowed during the pandemic. Usually this would mean that overall demand for housing would slow as well. However on the other hand both home sales increased and rental vacancy rates were declining. Housing demand was clearly up. The way you can square these different facts is if household formation increased overall. That means more, and smaller households among existing Oregonians, some of which was likely fueled by strong income growth, the desire for more personal space during a pandemic, and underlying demographics as Millennials fully aged into their 20s and 30s.

In real time we weren’t entirely sure that household formation truly picked up given both the lagged nature of the data and the fact that the 2020 ACS data were “experimental estimates”. It certainly made sense, but we couldn’t know entirely. Well, we no longer need to wonder. The just released 2021 figures confirm the household formation boom here in Oregon and across the country.

From 2019 to 2021, Oregon added a net 28,500 housing units. However over the same time period, the number of households in Oregon increased by 53,200. This means household formation during the pandemic outpaced net new construction by nearly 25,000 units. This is why the housing market is so tight, and why affordability is so bad. Oregon’s housing shortage is now even larger than we thought. Oregon needs to build more housing.

A few additional notes:

Of course Oregon is not alone. The housing shortage has gone national in recent years. Over this same time period, the U.S. added 2.5 million housing units, but the number of households increased 4.7 million. Not a single U.S. state added more housing units than households during the pandemic.

There is tons more here to dig into from local/metro level figures to household formation rates by age and the like. We will post more in the weeks and months ahead. Some of this likely will need to wait until December when the microdata is released.

Next week I’m in front of the House Committee on Housing discussing some of the latest work on what it would look like to actually increase Oregon’s housing production (new construction). I plan on posting a summary of that here on the blog.

Finally, given the tight housing market and affordability issues, our office expects household formation to slow this year and next. The pandemic era household formation boom will likely slow considerably, and in pockets, could even reverse somewhat. We could see some more individuals living at home a bit longer, or taking on more roommates to share the costs. And after the formation boom we just experienced, vacancy rates are the lowest they have been, so even if one can afford higher prices, out right availability of housing is a challenge.

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Posted by: Josh Lehner | September 15, 2022

Oregon Progress and Poverty, 2021 Edition

This morning the Census Bureau released the 2021 American Community Survey data. This is the best data set available to researchers as it provides not just high level measures looking at income, poverty, employment, commuting, housing and the like, but also the socio-economic characteristics of these measures as well. Importantly the 2021 data is a return to official Census estimates, whereas the 2020 numbers were “experimental estimates” due to low survey response rates. Today we will highlight just a couple important things, and in the months ahead we will dig further into the data and post updates on key topics.

If we step back and think about 2021, it’s a very strange year. We began the year in full pandemic mode, takeout only restaurants, a deep economic hole, and recovery rebates. We ended the year having added 100,000 jobs in Oregon, a tight labor market, and fast wage growth. It truly was a year of massive change from start to finish. It’s important to keep this in mind because the ACS is what’s called a continuous survey. This means there are always surveys going out to Oregonians. As such, you get some responses in January, some in February, some in March and so forth. So when we take all of that and average it together to talk about 2021, it’s a little funky. I suspect as we dig deeper into the data, some of that funkiness will surface, but for now let’s look at income and poverty in the state.

First, I need to put a disclaimer up front. I am not 100% sure how the recovery rebates are treated in the data. The income data are self-reported. There is a question about total income and then different types of income including wages, business income, etc but there is a public assistance one. So in theory recovery rebates could be included (and in practicality in terms of household finances, I think they are important) but the rebates were also essentially advanced tax refunds, so not technically more income but rather less tax owed. I am still digging into this and trying to figure it out. With that said, on to the tables published this morning.

Median household incomes in Oregon reached a new all-time high last year, even after accounting for inflation. Oregon’s median household income grew 5.4 percent overall, and 1.4 percent after adjusting for inflation. U.S. median household income grew 3.9 percent, but declined 0.3 percent after adjusting for inflation. Oregon’s median income now stands 2.6 percent higher than the U.S. This is the largest relative vantage point for our typical household vis a vis the nation in at least three generations. Oregon income growth this past decade has been much stronger than in most parts of the country.

While middle-income households have fared well when you consider it’s been a global pandemic, a deep recession, and high inflation, we see some diverging trends at the top and bottom of the distribution. This next chart compares income growth by quintile in Oregon from 2019 to 2021. Census did not publish these figures for the 2020 experimental estimates, but getting a snapshot comparison of pre-pandemic to mid-pandemic can still be useful.

Here we see that the middle 60 percent of Oregon households have all seen their incomes rise faster than inflation. Most of us have been able to keep our heads above water financially, even if it doesn’t always feel that way. Our highest income neighbors have fared even better in recent years (and decades). Given that high-wage jobs were impacted the least during the recession, and asset markets boomed, at least through the end of 2021, this isn’t really a surprise.

However what stands our here is that our lowest income neighbors have lost ground. This is where the impact of the recovery rebates would be the biggest, certainly in percentage terms. I will update as I learn more. But, looking at the published data, on average, incomes for the lowest 20 percent of Oregon households, those with incomes less than $30,000 per year, are 4 percent lower than before the pandemic, after accounting for inflation. The underlying causes here is something I will dig into further in the months ahead. Is this driven more by the fact that low-wage industries bore the brunt of the pandemic, but have now recovered quickly in late 2021 and so far in 2022, or by something like our fixed-income neighbors haven’t been able to keep pace with overall growth and inflation?

Regardless of the exact reason for the low-income declines, it does mean that poverty in 2021 increased. Oregon’s poverty rate rose to 12.2 percent, while the U.S. rose to 12.8 percent.

Finally, the increase in poverty affected all Oregonians, as the racial poverty gap did not widen. This is in keeping with overall trends this cycle where a lot of long-standing disparities that typically widen during recessions, did not widen during the pandemic.

Now, poverty among Black, Indigenous, and People of Color remains higher than for their white, non-Hispanic neighbors, at 14.8 percent compared to 11.2 percent. However last year poverty increased 1.4 percent for white, non-Hispanic Oregonians, and 1.0 percent for BIPOC Oregonians. Technically this marks the smallest racial poverty gap on record, but is no real comfort when poverty increased.

As I mentioned, I don’t have all the answers this morning as the data was just released. The impact of the recovery rebates, and other pandemic era aid like enhanced UI, the child tax credit and the like are important. In a separate data release earlier this week, Census found that the official poverty measure nationwide ticked up a little, but the so-called supplemental poverty measure declined considerably. The SPM looks at post-tax and transfer (public assistance) incomes, and is therefore a better gauge of poverty last year than looking at just pre-tax earnings. Some of those technical differences should be less of an issue in the ACS than in the household survey (CPS ASEC) but could still be an important factor. As we learn more and more data is released, we will continue to post updates and findings. Our office will also dig into the data included in the ACS like household formation, characteristics of migrants, working from home, and the like. Stay tuned for more in the weeks ahead.

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Posted by: Josh Lehner | September 13, 2022

Oregon Maximum Rent Increase 2023: 14.6%

What you need to know: The allowable rent increase for the 2023 calendar year is 14.6%.

Oregon’s maximum allowable rent increase is calculated as 7% plus the West Region Consumer Price Index. It is important to keep in mind that the CPI calculation uses a 12 month average, and over the past year this comes out to 7.6%. See our office’s Rent Stabilization page for more, including a downloadable spreadsheet with all the data.

Given the recent bout of inflation the economy is experiencing — the fastest in 40 years — next year’s maximum rent increase follows suit. Here is what our office wrote in our forecast document the other week:

While overall market rents rarely move at the maximum allowable amount, a larger increase likely strains more household budgets. In reality, renters face the options of paying the higher prices, trying to find a more affordable unit in a really tight housing market where vacancy rates are low, or taking on more roommates to spread the higher housing costs across more people.

Looking forward, inflation currently is and will slow. Future maximum rent increases will be lower than 2023’s. Even so, given how high inflation is recently, and the 12 month average calculation, 2024’s figure will likely still be somewhat elevated as inflation will only just then be returning to the Federal Reserve’s target based on current forecasts. Our office will publish the 2024 maximum allowable rent increase a year from now, in mid-September 2023.

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